ROMANIA: An Introduction to Restructuring/Insolvency

The Tip of the Iceberg 

2017 was a hectic year, with positive macroeconomic results but a rather complicated political and social arena, marked by events that influenced and challenged the Romanian business environment.

Even since the beginning of 2017, there have been significant public debates on topics relating to important legislative amendments mainly in the tax area. Major topics have revolved around the taxation of companies’ turnover by 1% as a general measure, split VAT and transfer of payment of contributions from employers to employees. The last quarter of the year faced an increase of the inflation rate, which reached its highest level of the last years, with an ever-increasing accelerated effect on the ROBOR interest rate index and the exchange rate, causing instability and a series of concerns on the financial market.

Nonetheless, Romania’s economic growth in 2017 was spectacular, our country ranking among the most dynamic economies of the European Union. It is a growth supported mainly by consumption, but which, according to estimates, will maintain also during 2018 at a level between 4% and 5%.

The past year remained stable in the insolvency area, there have been no major legislative changes, the developments of the previous years encouraging and pushing all participants in the insolvency procedure – businessmen, insolvency practitioners and professional bodies - to show more confidence by enhancing the transparency and predictability of the procedure.

In the insolvency area we could see an increase of the percentage of capitalisation of the assets of the companies in bankruptcy in the context of a market thawing specific to the sale of such assets, but also in the context of a slight increase in the number of new insolvencies.

In this regard, the available statistics today show a 7% rise in the number of insolvency proceedings opened in 2017 as compared to 2016, the year with the fewest registered insolvent companies since the debut of the economic crisis in 2007 until present.

The data show that insolvency is mainly caused by the accelerated growth of debts over income, corroborated with the accumulation of losses, which, practically, evidence the limited capacity companies have to become more efficient in the context of increased income, as well as by the financing of long-term investments with short-term resources.

Consequently, the increase in the number of insolvencies can be attributed to the lack of management experience of new small or medium-sized companies on the market, established after the economic crisis, but also to the boost of the polarisation of incomes, profits and liquidities among large companies.

Statistical data also show that at the end of 2016, the largest active companies in Romania, which represent 1% of the total number of active companies, concentrated approximately 58% of the liquidity of the entire business environment.

As we look forward to the new year, one of the landmark events of 2018 will be the becoming effective of the law on natural persons’ insolvency, which may represent a remedy for natural persons’ over-indebtedness as compared to the means that was previously available in certain situations, namely the law on giving in payment whose application was nuanced by a decision of the Constitutional Court in the sense of analysis of the applicability of the law in terms of the theory of hardship in agreements in all the cases in which the law would have been invoked by debtors.

In essence, the support offered by the law on natural persons’ insolvency consists in the establishing of the legal framework for the release from residual debts of those persons who are in debt payment default, are of good faith, have debts higher than their assets and pay non-commercial debts to a certain extent.

Similar to the insolvency law for professionals, the natural persons’ insolvency law also confers protection to debtors against individual enforcements, any such procedure existing at the procedure opening date being suspended and, at the same time, significant support is granted by the fact that from the same moment the accrual of default interests, penalties or other types of additional costs to the debts existing at the date when insolvency is initiated are stopped.

At the same time, we expect that in 2018 the effects of the law on split VAT on insolvent companies or that have debts to the state budget will lead to a decrease of available liquidities, which will affect the chances of reorganisation of the companies.

Against this background, we expect the number of insolvencies to remain at a relatively constant level during 2018, with possible changes in the second semester of the year due to a forecast fall of consumption as a consequence of inflation increase and implicitly of diminution of available incomes.